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In a recent advisory opinion, the Centers for Medicare and Medicaid Services (CMS) addressed the proposed addition of observation beds to an existing physician-owned hospital for purposes of the “whole hospital” exception under the Stark Law. Specifically, CMS stated that the addition of 14 observation beds would not constitute an impermissible expansion of facility capacity under Section 1877(i)(1)(B) of the Social Security Act. The opinion is titled CMS-AO-2013-03, and it was issued Nov. 11.


The Stark Law prohibits physicians from referring Medicare or Medicaid patients to an entity for designated health services (DHS) when the physician, or an immediate family member of the physician, has a financial relationship with that entity. The Stark Law also prohibits the entity that furnishes the DHS from submitting any claims resulting from a prohibited referral to Medicare, the patient, any third-party payor, or other entity.

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